The Housing Market, Company Valuations, & Low Interest Rates

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FIRST PERSON / RINSE AND REPEAT

Could the decisions being made in the financial and housing markets be déjà vu all over again?

First, we get Zillow, Redfin, and eXp getting huge valuations on businesses that have made no discernable profit in their years of existence. For Zillow and Redfin, it’s been over ten years since their founding.

Then, we get the entry of iBuyers, who are on the way to buying tens of thousands of homes each year, now followed by Realogy, Keller Williams, and a host of others offering to purchase homes. We also have Knock and Ribbon advancing funds to assist people in buying their first or move-up homes.

Just when we thought there might be some sanity, Compass raises over $1.5 billion to fund the acquisition of agents, teams, brokerage firms, and an enormous tech platform. In doing so, they get a reported private market valuation of $6.4 billion—more than Realogy and RE/MAX LLC combined.

Now, such firms as Divvy, ZeroDown, and Flyhomes are buying homes for people and pursuing a rent-to-own strategy (with some variations) for families who either can’t qualify for a mortgage or lack a down payment, or both.

Let’s not forget how many housing-related shows are being broadcast these days, popularizing the buying and selling of homes, and how cool it is to be a real estate agent.

Does it seem like there is the same crazy belief as in the past that housing prices have only one way to go—up? Does it remind you of the way it was in 2005-2006?

Someone asked me a great question the other day about interest rates. I didn’t have a good, technical answer. He asked, “Is it possible that we’ll see negative interest rates in the United States, as they are now seeing in Europe and Japan?” I responded that I found it hard to believe we would get there, but that I genuinely did not know whether it was feasible in our country.

Think about these truths for a moment:

  • Rates are already lower than anyone can remember, and there are plentiful sources of funds from the regulated side of the banking business, and the less-well regulated.
  • Despite the low rates, housing sales are mostly flat. We know that much of this is caused by a lack of inventory and critical levels of affordability. Then again, while everyone knows the solution is more housing construction, many local and state governments are doing their best to depress housing construction through rent controls and other measures.
  • Housing price increases have calmed somewhat but are still higher than the increase in average household incomes.
  • Investors are now pouring billions into the housing market to help people buy, sell, or rent-to-own homes. Other billions are pouring into housing services, as mentioned above.

Back to the question of negative interest rates—this appears to happen when the economy of a nation cannot generate the kind of growth it needs, resulting in that nation’s central bank lowering rates to provide stimulus. The lack of growth can lead to deflation, something more dangerous than moderate inflation.

Have you noticed that our nation’s leaders for the past ten years have been running massive deficits in an attempt to keep the economy going? And, that’s been happening in addition to record low rates? Yet, the economy seems to be slowing down. What tricks do they have should this modest slowdown turn into more of a recession?

Lower rates? How low do they have to go to cause an uptick in the economy? I am no economist, but it does seem that low rates and deficits that pump excess liquidity into the economy are meant to prop up an otherwise underperforming business climate. But, how much liquidity and how low do rates have to go when both are already set on one of the highest gears we’ve ever seen?

Now, let’s get back to housing—let’s stimulate housing through low rates. Let’s have dozens of firms buy homes for people who can’t otherwise afford them. Let’s constrain housing stock supply driving prices up further.

It should give us all pause. Could it be déjà vu all over again?

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This article originally appeared in the November 2019 issue of the REAL Trends Newsletter. It is reprinted with permission of REAL Trends, Inc. Copyright © 2019. To read the rest of this issue & more, please visit our Real Trends page online.

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